A Reprieve(?)

Warning: this is not fiction. Do not adjust your browser.

The Citgo station close to the office is selling gas under $1.50 a gallon, and I managed a 6 under par in Wii Sports golf this evening. In other news…



I remember $1.50/gal gas back in 2000. At that price, it’s now roughly 1/3 the price it was during the late summer (assisted by a couple of hurricanes, if you remember the fun we had in September). Here I issue my OOPS: I never expected to see this. $2, maybe. If I’d been asked to name a “floor” price in July, the absolute lowest we’d ever see again, I probably would have said $2.50.

So… what happened?

The easy answer would be, “the credit bubble popped.” A more involved answer would involve the general drubbing the economy has taken since the housing bubble popped, which led to the credit bubble popping, which led to just about everything else we’re seeing right now… including the FAILouts for the banking and auto industries.

Actually, a lot of this (excluding the FAILouts) was predicted by one of the Peak Oil models. The general plot is that as high oil prices drive up the price of pretty much everything, people cut 'way back on purchases to buy gas and the economy collapses; demand craters, oil prices plummet, lather rinse repeat. But I think even that model didn’t predict that oil would get downright cheap again. Some pundits are predicting $25/bbl, and that might actually happen briefly… right now, distributors are building inventories during a time that they usually deplete them to avoid inventory taxes. Once they reach capacity, that particular price prop goes away. Normally, I’d say something like “fat effing chance it gets to $25/bbl,” but maybe I’ve learned my lesson.

The big question is, what happens when low low oil prices start to stimulate the economy? I think that’s going to put us right back in the soup. The “free market” is reactive, but not quickly… which is at least part of our problem here. The market reacted to demand hitting absolute oil supply constraints earlier this year, and sent oil prices skyrocketing. When that happened, gas prices spiked to $4/gal, higher in some places, and diesel was even worse. Since pretty much everything depends on oil these days, prices of pretty much everything went up (i.e. inflation). Without a corresponding rise in wages (yeah right, in a Bush-league administration?), people started watching their spending — they either had to buy gas to get to work, or buy bus tickets, so they let everything else slide… which meant the retail economy went to hell in a handbasket. The US economy depends far too much on people buying stuff they don’t need, and don’t particularly want, so there was a huge ripple effect.

But while oil prices have collapsed, so have the business models of “non-conventional” production like the Canadian tar sands and many of the deep-water projects… at $40/bbl, they lose money, so I don’t expect to see them going for much longer. The “fun” part is, the world oil production figures reached a plateau in late 2005 and have been there ever since. In 2008, the numbers went up a bit, but included tar sands and some deep-water projects. In 2009, there will likely be a significant drop in world oil production — partly because of peak oil and partly because OPEC is chasing down demand. The question is, will the world ever be able to reach 2008 production levels again? I suspect not, partly because the oil companies will shut down expensive projects which would be needed to offset normal depletion rates. But as depletion sets in, it’s fairly likely that the economy will start to recover… and push up demand for oil. And this is the jumping-off point for FAR Future.

As slim a hope as it is, I thank God that Obama got elected. If anyone can at least slow down the biggest problems coming our way… it certainly wouldn’t be a Republican.